“Politicians like to invoke the trade deficit as a dire indication of American decline, but the reality is significantly more complicated,” says John Graham, a professor emeritus and the lead author of the U.S.-China Barometer. “Our surplus exports in the services category are burgeoning, but they are uncounted in the merchandise trade statistics.” • iStock by Getty Images

Rising U.S.-China Trade Deficit Fails to Reflect Complicated Relationship, Says Merage School Professor

March 17, 2019 • By Aaron Orlowski

The trade deficit between the U.S. and China reached an all-time high in 2018, while collaboration between U.S. and Chinese inventors declined for the first time in recent years, according to a new report from the UCI Paul Merage School of Business.

But while the $400 billion trade deficit is eye-popping, it isn’t the most important aspect of the dynamic, tangled relationship between the world’s two largest economies, says John Graham, a professor emeritus of marketing and international business and the lead author of the report, the 2019 U.S.-China Barometer. The report is sponsored by the Long U.S.-China Institute.

The $400 billion figure counts only merchandise, and not services such as education, tourism and financial services, notes Graham, who is also the faculty director of the Center for Global Leadership and Sustainability. The U.S. continues to sell about $20 billion more in services to China than China sells to the U.S.

“Politicians like to invoke the trade deficit as a dire indication of American decline, but the reality is significantly more complicated,” Graham says. “Our surplus exports in the services category are burgeoning, but they are uncounted in the merchandise trade statistics.”

Additionally, many of the goods the U.S. imports from China, such as iPhones, are only assembled there. The parts, labor and value are actually produced in Japan, South Korea, Germany and even the U.S.

China’s heft as a technology and innovation powerhouse is growing, says Graham.

“Early on, developing countries tend to steal technology, as China did for years,” says Graham. “But as countries build their own capacity, they set up stronger regulations. China is doing that now.”

Technological collaboration between American and Chinese inventors has also risen in recent years, with more than 2,000 U.S. patents awarded to teams of American and Chinese collaborators per year in each of the last three years. However, in 2018, the number of those patents declined for the first time.

“In recent years, it has been heartening to see that despite the friction over intellectual property, teams of Chinese and American collaborators have won more and more patents together,” Graham says. “But the dip in those patents in 2018 was unfortunate. No one can say why it happened.”

Interest in China among Americans also appears to be declining with fewer American students studying Chinese. And even though many Chinese students, who study routinely study English in elementary school, continue to flock to the U.S. for an education, few U.S. students go to China.

Some indicators of the countries’ vitality are dire: More than half a billion people in China are still living in poverty and in the U.S. life expectancy is dropping for the first time. But overall, the life of the average consumer in both countries has consistently improved since 1985 and the relationship between the two countries continues to grow stronger. Total trade has risen every years since 1985, except for two — 2009 and 2016.

“This is the most synergistic bilateral relationship in human history,” Graham says. “It has pulled half a billion people in China out of poverty in just a few decades, while contributing to making people in the U.S. better off at the same time.”